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News Digest

Fortnightly Magazine - January 1 2001

in the U.K., and identified fundamental problems with the power exchange concept that unfortunately have been realized."

In their paper attached to comments filed by Southern California Edison, consultant Scott Harvey and professor William Hogan offered new explanations of structural market flaws in California.

"Prices have been high in California," they wrote, "surprisingly high."

In particular, Harvey and Hogan noted that because of the sequential nature of California markets, with a day-ahead auction for energy as a consumer product, followed by real-time auctions for ancillary services and energy system balancing, they believed that even those sellers lacking market power were withholding output from one auction to get a higher price in a later auction, thus causing day-ahead energy prices to rise to the level of opportunity costs represented by higher prices in later-clearing markets.

Surprisingly, however, they advised against abandoning the single-price principle in favor of a pay-as-bid auction. According to Harvey and Hogan, "pay-as-bid pricing systems introduce inefficiencies that raise market prices in a manner that can be hard to distinguish from the exercise of market power."

Costs, Caps, and Scarcity. At the other end, many power marketers and power plant owners, such as Dynegy, Enron, and Calpine, have begun to argue that prices are not really out of line-they simply represent rising costs and scarcity of supply when compared with demand.

The marketers and power producers not only oppose the idea of price caps, but question how the FERC can hope to calculate a "just and reasonable" price for power, based on fuel prices, plant operating costs and characteristics, and the owner's profit expectations, when costs are changing so rapidly and each power plant and owner is unique.

Comments offered at the FERC's Nov. 9 hearing in Washington suggested that a reasonable power price, based on the costs of a gas-fired peaking plant, might vary anywhere between $75 and $350 per megawatt-hour, or even higher, even with the heat rate held constant, depending on such factors as the number of hours in the year during which the plant operates, and the number of years that the owners expect to wait before recovering their fixed costs.

Anyone eager to define the cost of generation should read the California PUC's motion in which it literally begs the FERC to help it force power plant owners to answer subpoenas requiring them to supply cost data. "The CPUC wants to know how much money each generating and trading entity is making."

On Nov. 14, California PX CEO George Sladoje announced the formation of a "Blue Ribbon Panel," led by Professor Alfred Kahn, to investigate criticisms of California's power markets and to determine whether the current rules for setting market-clearing prices in the PX day-ahead market produce a "fair and efficient" electricity price. The panel was to solicit comments from interested parties and meet in New York City on Nov. 28, and later in San Francisco on Dec. 12.

Mergers & Acquisitions

Sierra + PGE. Still following its old policy predating Order 642, FERC allowed Sierra Pacific Resources to acquire Portland General Electric, relying on